MP Materials Corp. (NYSE:MP) Q2 2024 Earnings Call Transcript

MP Materials Corp. (NYSE:MP) Q2 2024 Earnings Call Transcript August 1, 2024

MP Materials Corp. misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.1.

Operator: Good afternoon, and welcome to the MP Materials’ Second Quarter 2024 Earnings Call and Webcast. My name is Harry, and I’ll be your operator today. At this time, all participant lines are in a listen-only mode. There will be an opportunity for question-and-answers after management’s prepared remarks. [Operator Instructions] I would now like to hand the conference over to Martin Sheehan, Head of Investor Relations. Thank you. Please go ahead.

Martin Sheehan: Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials’ second quarter 2024 earnings conference call. With me today from MP Materials are Jim Litinsky, Founder, Chairman and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. As a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the Company’s actual results to differ materially from these statements are included in today’s presentation, earnings release and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation.

Reconciliations to the most directly comparable GAAP financial measures can be found in today’s earnings release and the appendix to today’s slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA and tons means metric tons. Finally, the earnings release and slide presentation are available on our website. With that, I’ll turn the call over to Jim. Jim?

James H. Litinsky: Thanks, Martin. Hello, everyone. As is our usual program, I will review the quarter at a high-level. Ryan will then cover our financial performance and operating KPIs, Michael will follow with an overview and updates on Mountain Pass operations, and I will then return with closing remarks before Q&A. So, let’s get to it on Slide 4. This was a very challenging quarter, operationally and financially. Production in our upstream business was hindered by rake damage and a thickener that impacted operations for about three weeks. This was our biggest disruption in seven years. Michael and Ryan will provide a lot more detail later in the call, but suffice to say, the unanticipated downtime impacted REO production as well as our financial performance in the quarter.

In about an hour though, when we finish this call, this tough quarter will be completely behind us as the team responded to the recent adversity in our usual unwavering fashion. Production momentum coming out of Q2 and into Q3 has been very strong. In Q2, we actually achieved our second best quarter of upstream productivity measured by REO produced per hour of uptime. In other words, when the upstream was operating, the team ran it about as efficiently as ever, and we are building on that momentum going into Q3. So, while it is still early, Q3 appears on-track for record levels of upstream production. Some of this production growth is from early results in our Upstream 60K optimization efforts. Through these efforts we are already seeing higher recoveries out of the upstream, which is promising and bodes well for the future.

So, unfortunately, our Q2 results today reflect the financial impact of repair costs and lost efficiencies in one of our most challenging operating periods to-date as well as a continued weak pricing environment. But, we are confident that beneath those headlines, the silver lining of this quarter is that we’ve responded well to an unanticipated challenge and accomplished a lot in the upstream that should position us well going forward. Moreover, and despite all the upstream challenges, we more than doubled NdPr production in the quarter to over 270 metric tons. This is the best midstream result we have achieved to-date, and we expect another 50% increase in NdPr production in Q3. Over the past two months, we have seen improvements which will continue to drive down NdPr production costs in the coming quarters.

We are not where we want to be yet, but we expect per unit cost to materially improve as production ramps. This progress is well-aligned with customer development activities. In the quarter, we signed an agreement for a substantial commitment of NdPr oxide with a new customer, a household name global automaker. We expect to begin delivering NdPr to them later this year, ramping into 2025. We also were awarded a contract to supply NdPr to the Department of Defense in addition to our existing contract to provide lanthanum. Finally, in our downstream business, as we mentioned last quarter, we achieved important milestones in producing magnet precursor products, unlocking a $50 million prepayment in the quarter. I would also like to add that we expect to earn approximately $190 million of incremental cash sources from additional customer prepayments and tax credits by the end of 2025.

This means we still expect to maintain our strong balance sheet even as we complete the remaining investments in our magnetic facility, ramp up our midstream production at Mountain Pass, and navigate a weak pricing environment. Installation and commissioning activities at the factory are progressing, and we remain on-track to begin commercial production of NdPr metal later this year. In support of product development, we have commissioned our prototype production line and analytical labs. The prototype line has all the equipment needed to transform metal into a finished magnet, which enables us to produce prototype magnet precursor materials and finish magnets and optimize our processes at the kilogram scale using equipment similar to and, in many cases, manufactured by the same vendors as our commercial scale equipment.

In recent weeks, we made our first magnets from powder to finish magnet and made significant progress on our grain boundary diffusion process. In our accompanying in-house laboratories at Fort Worth, which we commissioned in the quarter, we are now able to validate magnet and magnet precursor materials without enduring lengthy third-party turnaround times. These are critical steps on the road to producing high-quality magnets for our customers. With that, let me turn it over to Ryan, to run through our KPIs and our financials for the quarter. Ryan?

Ryan S. Corbett: Thanks, Jim. Moving to Slide 6, you will see the impact of the extended downtime on our production in the quarter. We produced 9,084 metric tons of REO in concentrate, about 16% less than a year ago and 19% lower than last quarter, which was the second highest quarter of production in our history. This unplanned downtime was on top of our usual planned downtime of about one week for plant maintenance. As Jim mentioned, we had significant damage to the rake in one of our thickeners soon after we completed our planned maintenance shutdown. Unfortunately, without these rake operating, the whole upstream operation had to shut down. The lower production volumes, some impact of shipment timing, as well as more concentrate being refined to NdPr, all combined to reduce REO sales volumes to 5,839 metric tons.

To give you a sense of the drivers of the sequential sales volume decline of roughly 3,500 metric tons. Approximately 60% of the decline was due to the lower upstream production. About 30% was due to higher consumption of concentrate into the midstream circuits as NdPr production ramped up, while the remainder was due to shipment timing. The temporarily lower upstream sales volume along with one-time repair costs combined to drive rapid de-scaling in the upstream business, and therefore much higher than normal production costs in the quarter. As Jim stated, we returned to strong efficient production in June and July. In fact, we expect Q3, if current production trends remain intact, maybe one of our best upstream quarters ever. Finishing off the discussion on the upstream, realized pricing in the quarter was approximately $4,183 per metric ton in-line with the guidance we provided back in early May.

Moving to our midstream KPIs, NdPr production more than doubled to 272 metric tons in the quarter, while sales of NdPr were in-line with the prior quarter’s production at 136 tons. NdPr realized pricing in the quarter was roughly $48 per kilogram. All of these metrics were in-line with our guidance provided in May. Looking forward to Q3, as of today, we would expect concentrate production volumes slightly above our typical levels in a non-shutdown quarter. Sales volumes will benefit from the higher production, but will be partially offset by the higher pull-through of concentrate into the midstream circuits as we ramp NdPr production volume, which as Jim mentioned, we expect at least a 50% sequential increase in Q3, while sales volumes are expected to be approximately in-line with Q2’s production of 272 metric tons.

Recall, as we discussed in May and as you saw this quarter, NdPr sales volumes will lag production volumes by about one quarter on average, partially due to the metallization process and the initial build out of our separated product sales channels. As for pricing, we would expect Q3 pricing to be down low-single-digit percentages sequentially for both REO and concentrate and NdPr oxide sales. Moving to Slide 7. On the far left side, you can see the impact of the lower concentrate sales volumes, the lower NdPr pricing and a longer sales cycle for NdPr sales on our revenue trends. It is important to remember that as we transition from upstream concentrate sales to NdPr oxide and metal sales, the concentrate sales will initially decline more quickly than our NdPr sales will ramp up.

We are in the heart of this transition period, a critical juncture we have long warned investors about as we evolve into a fully integrated miner and refiner. Unfortunately, the financial impacts of this transition were compounded by additional unplanned downtime and repair costs this quarter, alongside what would have already been a significant investment period. Moving to the middle and right of the slide, we posted an adjusted EBITDA loss of $27.1 million and adjusted diluted loss per share of $0.17 in the quarter due to several factors. First, as we have discussed over the last few quarters, our midstream operation is currently subscale as we ramp production of NdPr and other separated products. This quarter, we absorbed the impact of higher than target variable costs as we optimize production as well as difficult fixed cost absorption at these lower production levels.

This temporary period of subscale production resulted in us taking an inventory reserve of $11.8 million in the quarter. This relates to the currently elevated cost of production versus the continued pressure on market prices. The second major impact in the quarter was the unplanned downtime, which showed up in the lost production and revenue and also combined to create both higher per unit production costs and one-time repair expenses hitting the P&L. The concentrate unit cost of production was impacted by inefficiencies in the start stop, lower fixed cost absorption, and higher repair and maintenance expenses from our planned maintenance shutdown. This impacts both the concentrate cost of goods sold directly, but also found its way into our separated product production costs in the quarter, given the interconnectedness of our operation.

Further, this quarter’s earnings were impacted by several million dollars of costs associated with the repair of the thickener rake, including for equipment, labor and contractor costs. This impact, of course, we expect to be one-time in nature. Lastly, recall that even at these low prices at normal production levels, our concentrate business generates $2,000 to $3,000 of gross margin per ton of REO in concentrates sold. As we ramp the refining operation, we are temporarily trading some level of profitable concentrate sales for temporarily unprofitable NdPr sales in this sub-scaled state. We are also investing working capital dollars into the transition as our sales and tolling channels for separated products built. But, as we have highlighted for the last few quarters, this is why we are being methodical in our midstream production ramp and we remain confident that over the long-term, this is an investment we will be happy to have made.

Recently, we have made very good progress in optimizing the incremental variable costs we are seeing, and importantly, see a clear path to further optimization of variable costs and rightsizing of fixed cost absorption as we push forward in our ramp over the coming quarters. Importantly, we expect that the combination will reduce our per unit production costs materially. I want to reemphasize what Jim pointed out. Over the last 8-weeks to 10-weeks, we have returned the upstream to its high-production, low cost profile you are all used to seeing. We have also made significant progress in midstream optimization, both in terms of cost and production levels. While our midstream cost structure won’t be at target for several more quarters as we continue to ramp and react to bottlenecks.

We see very clear signs of early success that will bear fruit over time. I would also point out that despite a challenging quarter financially, our balance sheet remains in great shape. Again, we received a $50 million customer prepayment for magnet precursor materials in April and expect another $100 million of additional prepayments over the next year. In addition, we will earn and for the majority expect to receive cash for the various IRA tax credits approaching another $90 million through 2025. This provides a further buttress to an already strong balance sheet as we complete Fort Worth and invest in the separated product transition, following which we expect operating cash flows to meaningfully improve. With that, let me turn it to Michael, to give you some of the technical details and updates on the operations.

Michael?

Michael Rosenthal: Thanks, Ryan. On Slide 8, we have a drone shot from above the pit. You could see the upper rim of the pit in the foreground with the separations pad on the right side. For those of you who haven’t seen it before, the very long building on the right is our light rare separations facility where we separate NdPr from lanthanum and any remaining cerium. Moving to our operations, second quarter performance was severely impacted by rake damage in one of our thickeners that Jim and Ryan described. This issue impacted production for approximately three weeks on top of the planned one week semi-annual maintenance outage during the quarter. Our teams, supported by certain contractors and service providers, worked tirelessly and around the clock to restore full operation.

We resumed partial operations with some concentrate production only 10 days after the incident. Though for the duration of the repairs and improvements, concentrate quantity, grade, and stability were meaningfully impacted. The reduction in upstream production reduced concentrate sales and curtailed feedstock for midstream operations for several weeks from mid-May into early June. This was easily the biggest disruption our operation has sustained in the past seven years. While we are not happy about the incident, the creative and coordinated efforts of our team through this challenge were remarkable and inspiring, and we finished the quarter having produced more than 9,000 tons of REO and concentrate. Once normal operations were restored, we accelerated the progress we have been making on all fronts, and it’s quite satisfying to see the momentum we are building in many areas.

Concentrate production per operating hour improved, and June represented one of our best months ever with higher production at higher grade. In addition, we are beginning to realize some of the efficiency gains in our midstream business that I discussed on previous calls. Notwithstanding the extra downtime that impacted feedstock for the midstream operations into June, we were able to approximately double NdPr oxide production quarter-over-quarter. NdPr oxide quality has been very good as is the quality of NdPr metal that is now being consistently delivered to our magnet maker customers. Mechanical reliability of our new assets remains one of the biggest challenges in the midstream operation, but we are seeing noticeable improvement largely corresponding to process maturity and as certain supply chain impediments are resolved.

As I look ahead to the balance of the year, we will remain focused on uptime and executing certain projects in our upstream business and balancing uptime, process optimization, and production cost in our midstream circuits. Strong concentrate production has continued into Q3. We are optimistic that non-capital related optimizations we have implemented this year have moved our grade recovery curve favorably. These optimizations may free-up real estate in our concentrator facility for future improvements and or growth. Separately, we have two Upstream 60K related capital projects that will begin commissioning this quarter, so we wouldn’t count on any benefits until next year. The first is a large scale pilot of alternative flotation equipment.

The second is the more sizable investment in our grinding circuit that we hope will ensure a tighter and more favorable grind distribution that should improve recovery and throughput potential. In the midstream circuits, with improved mechanical stability, we are starting to achieve higher availability. As our teams gain experience and confidence, our execution is improving, and we are able to work through issues that previously slowed production. However, as we have done so, we have identified a handful of process bottlenecks, and we have straightforward plans to address many of these through the balance of the year. Our processes to recycle our wastewater is a good example. These circuits remove impurities from our process wastewater, allowing us to recycle the water and minimize or eliminate the need for freshwater in our midstream processes.

They are therefore critical circuits for water balance, environmental sustainability, and operating cost. When not running to their potential, they have proved a modest impediment to higher throughput and uptime. In recent weeks, we have greatly improved their performance in all operating environments, allowing for greater uptime in the rest of the plant in subsequent periods. We are also laser focused on improving the NdPr recoveries in our Leach circuit, where despite success in cerium rejection, we see a huge opportunity for improved NdPr recovery and even better cerium rejection. Incremental progress will be a major contributor to better leverage of our reagent consumption sitewide. The impact of this is material as reagents represent our largest production cost category.

Another opportunity was realized in late Q2 and early Q3. We completed the replacement of both turbines in our power plant that had reached the end of operating life. This was completed with less interruption to operations than feared and allows us greater power production capability at lower cost. We now expect to be able to sustain our current operation on one turbine for a larger portion of time even as we ramp the chemical plant further, resulting in lower heat rate and better than previously assumed cost performance. We are very pleased with the outcome and congratulate our utilities, E&I, process controls, and commissioning teams on the excellent job. Summing up the above and assuming the continuation of current trends, we are expecting a strong quarter of concentrate production and at least 50% quarter-over-quarter NdPr oxide production growth in Q3 versus Q2.

July results put us on this path. With that, I will turn it back to Jim.

James H. Litinsky: Thank you, Michael. Let’s turn to Slide 9 with the recent shot of the magnetic facility at [Texas] (ph). To wrap up, this was undoubtedly our worst financial performance quarter as a public company. I hope I have always been clear that these kinds of quarters can happen once in a while. But as I said earlier, beyond the surface results, we made a substantial amount of progress. Our team is spectacular and relentless. Notwithstanding MP’s unwavering nature, pricing conditions remain outside our control. We do know that no producers are thriving at these prices, not even in China. These market conditions have now destroyed most of the hoped poor projects from just a couple years back. Despite the efforts and investments of many governments, Chinese control over the vast majority of the supply chain remains.

Rare earths, therefore, continue to be at the center of a highly charged geopolitical environment. In June, China tightened regulations over its domestic industry. Meanwhile, in the west, leaders pursue new protective measures of their own. And, with an election season in full swing, the criticality of our supply chain is one of the very few things upon which politicians in Washington agree. How this shakes out over a quarter or two is always uncertain, but what remains certain is the strategic irreplaceable value of the platform we are building at MP. In recent weeks, our team has turned a corner at Mountain Pass both on cost structure and ramp, and we are now positioned to scale volumes and complete our evolution as a fully integrated producer of refined rare earths.

The timing aligns well with customer development activities. As I mentioned at the outset, we recently added another household name automaker to our growing client list. Between this new agreement and new and expanded agreements tied to our Sumitomo distributorship, a significant portion of our anticipated NdPr production at full capacity is now committed. With our products now qualified by some of the most scrupulous end use manufacturers and magnet makers outside of China, MP’s position as the American champion is now cemented. Our downstream magnetics business is approaching a similar inflection point, and later this year, we’ll return large scale rare earth metal production to the United States for the first time in many decades. In July, Michael and I celebrated the 7th anniversary of the acquisition of the Mountain Pass Mine and the founding of MP Materials.

We are incredibly proud of the team we’ve built, the progress we have made, and even more excited about the future. In a geopolitically charged increasingly electrified world with billions of AI enabled robots, whether on wheels or legs, MP’s products, technology and platform matters. I believe our long term success is necessary and inevitable. With that, we’re happy to take your questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question today is from the line of David Dekelbaum of TD Cowen. Please go ahead. Your line is open.

David Dekelbaum: Thanks, Jim, Ryan, and Michael. Thanks for taking my questions, and thanks for all the details. I’m glad to see you guys putting this quarter behind you. I’m curious, Michael, if you can talk a little bit about just with this first upstream 60k milestone with the pilot testing around flotation. That test, I think, is anticipated to begin this quarter in the third quarter. How do we think about that in relation to the impact on your current operations?

Michael Rosenthal: Thanks for the question. In terms of this initial test, we don’t expect it to have any material impact on the operation. We’ll be running a midstream through this equipment to see the performance, but we do expect it to ultimately need to additive results even as a pilot, and then we can look to scale that if the results are successful. We’ve already tried similar equipment, slightly smaller scale and been very pleased with the results. The grinding circuit investment that I mentioned is slightly bigger. It does have the potential for more temporary interference with the current operation. But like I said, I’m very excited about that one, particularly next year.

David Dekelbaum: I appreciate the color. Ryan, I’m curious just, as we kind of navigate this year of weak prices, I think you guys highlighted still a robust cash position even with the downtime this quarter. Just talking about, I think the $150 million or so of prepayment and I guess, some tax receipts that you anticipate. Can you just kind of rehash the timeline and the conditions that you have to meet in order to receive those payments?

Ryan S. Corbett: Yeah. Sure, David. Happy to. Yes. As you saw this quarter, we received the first $50 million of that $150 million set of prepayments for the downstream business. The way to think about the upcoming $100 million that is unlocked by further operational progress on the downstream business as we move towards commercial production of metal in Fort Worth, and continue to build up our metal making capabilities to support magnet making there. And so, we expect to receive the totality of that over the next 12 months. In terms of the incremental dollars that we flagged that are part of the various tax credits that we intend to receive, you saw actually in Q4 of last year, a receivable of nearly $20 million which relates to a 45x tax credit, which we expect to receive in the not too distant future here upon filing of our 2023 tax return.

So, that’s a pretty near-term receipt. The other elements of 45x relate to the ongoing 45x credits that we’ll earn via production over the course of this year and next. In addition to that, as we announced, I guess it was last quarter is the $58.5 million of 48C tax credit for our investment in Fort Worth. We expect to likely receive about $30 million of that in cash next year and the remainder of that is also available for us to monetize in a variety of different fashions earlier in the 2025 timeframe or we can sort of allow that to play out over a longer period of time. But suffice to say, we’ve got a lot of opportunity to continue to support really healthy liquidity and the balance sheet as we invest here.

David Dekelbaum: Thanks, guys.

Operator: Our next question today is from the line of Laurence Alexander of Jefferies. Please go ahead. Your line is open.

Kevin Estok: Hi. Good evening. This is, Kevin Estok on for Lawrence. Thank you for taking my questions. I’m not sure if you can answer the specifics around this, but I guess I just wanted to get a sense of maybe the size of the commitment that you have with the automaker that you announced today or maybe the length of time of the agreement, and maybe the same for the Department of Defense, supply contracts. I mean, just any specifics that you can offer would be helpful? Thank you.

Ryan S. Corbett: Yes. Sure. It’s Ryan. I’ll take that. In terms of the OEM commitment, that is a multi-year commitment with deliveries starting this year and ramping through ‘25 in the following year. We expect over the medium-term that this commitment will represent a double-digit percentage of our total targeted output. So, it’s a pretty significant commitment for us, which we’re very excited about. And, I think stepping back and taking both this commitment and the DoD purchase agreement in context, which I’ll give you some details about in a moment, I think it really is emblematic of some of the comments that Jim made about the importance of what we’re doing. I think rewinding to many, many years ago when we started on this mission, the thought that a global automotive OEM would be reaching all the way upstream to directly make this type of commitment was unheard of.

And so, I think that that speaks to the progress that we’ve made, both as MP and the increasing importance of our industry and what we produce. The DoD agreement is a pretty modest agreement. So, that was announced by them as well. It’s about $11 million commitment from them, for the National Defense stockpile. But again, emblematic of continued support from Department of Defense, which we’re very happy to see.

Kevin Estok: Yes. Sure. Great. Thank you. I appreciate that. And, I guess just my last question, I guess in terms of the Chinese economy and the weakness there, possible stimulus of puts and takes, and obviously there’s a flow through into pricing, I guess. Just curious to get what your guys’ take on the economy, maybe your outlook in the Chinese economy, would be helpful? Thank you.

Ryan S. Corbett: Sure. Yes, so the Chinese economy is still pretty challenged. I think we’ve been seeing that writ large around earnings season this year across, corporate America. We see that to property, everything related to it is very weak. It’s really just an overall negative environment with respect to industrial production and consumer spending. So, we don’t really have any different views than sort of what you’ve been hearing around the board, with respect to what’s going on in China. I would say though, as it relates to underlying NdPr demand, anecdotally we do see Chinese industry growing abroad, particularly in the global south, in sort of South America, Sub-Saharan Africa. So, when you think about sort of the pace of what’s happening in the Chinese economy, I would say that one mitigant is that Chinese industry is sort of attempting to make up for that with growth around the world, particularly in our space.

And so, I do think that, and again, as you know, I always try to caveat these answers with respect to commodity prices. We don’t know, but I do think that in the medium to long-term, the things that we’re seeing, continue to show that the medium and long-term demand picture is very bright from China all the way around the world.

Kevin Estok: Okay. Thank you very much. Sure.

Ryan S. Corbett: Sure.

Operator: The next question is from the line of Matt Summerville of D.A. Davidson. Please go ahead. Your line is open.

Matt Summerville: Yes. Thanks. Couple of questions. Just back to Jim, I’d like to just pick your brain a little bit. What was sort of the criteria you used to make the strategic decision to align yourself with this particular automotive OEM for this agreement? And, to Ryan’s comment, double-digits can mean a lot. Is there a way that you can maybe kind of narrow that down a bit? And more so, also curious as to whether or not this is causing panic, maybe too strong of a word, but causing other OEMs to come knocking on the door, so to speak, or lining up at the door to try and get in.

Ryan S. Corbett: Sure, Matt. I’m going to steal that one from Jim quickly. Just, you’re right. Double-digits is pretty broad. I can narrow that down to say, low-double-digits. And, obviously, we want to respect our customers’ wishes and not get into specific details on any individual contract. But I think that as we look around the world, we certainly are seeing a lot of interest in our commodity as I mentioned. And I think that what we are most focused on is maximizing the realized price that we receive for a product that we believe is incredibly important. And obviously, as we look at contract structure pricing and all those things go together, we are going to prioritize customers that are thoughtful over the long-term and are looking at this as partners.

And so that’s certainly what we did with General Motors with the downstream business. That’s absolutely what we’re doing with other OEM partners on the midstream business. And so, it’s something that we’re certainly very pleased about. In terms of other automakers panicking, I wouldn’t put it quite a panic at this point, but certainly, there’s a whole host of things that we’ve seen over the course of the last several months that have really, I think reenergized despite all of the headlines and sort of the Wall Street malaise on the electric vehicle trend. We’ve seen a lot of activity. Certainly, the tariff announcement by the current administration that may be caused a little bit of maybe you could call it panic in terms of automakers really being interested in what we’re doing from the magnetic side.

But overall, we’re really pleased to continue to build up our book of customers with blue chip automakers.

Matt Summerville: Thank you. And then, maybe for Michael, is there any way to kind of talk about based on the progress you’re seeing or you saw in Q2 where you’re tracking thus far in Q3 and your goal relative to that 50% production output increase of NdPr oxide. Is there any way to talk about where you hope to exit the year on a run rate basis in terms of NdPr production?

Michael Rosenthal: It’s still early, so it’s hard to give a clear answer on that, and I’d rather not. But I would say that whereas in the past, we saw greater bottlenecks to the production, we’re really working on optimizing and balancing the throughput and sorry, availability of equipment and getting that up and then pushing the throughput further. And whereas in the past, we may have seen more bottlenecks to availability, those are being released and we expect to see significant improvement. And I stated that July puts us on that path with a 50% growth. It’s probably where I’ll leave it, but I do believe there’s significant opportunity for continued growth in the fourth quarter. Jim or Ryan, I don’t know if you want to add anything to that.

James H. Litinsky: The one thing I’d add is I think the reason that you’re probably sensing a little bit of a shift in tone from us on this is, I think where we’ve progressed on understanding and getting our arms around the various moving pieces on incremental variable cost, we’re sort of at the point from a cost structure perspective in the midstream business where getting to our targeted cost structure at this point is more a denominator issue. So, this is more about pushing forward on our volume ramp, will effectively have the cost structure take care of itself. And so obviously, Michael talked through some of the steps along the way, but we’re very, very pleased to see that progress. And so I think that enables us to be even more tactical in how we approach the ramp here, over the course of the year.

So, as Michael said, it’s early to give specific numbers on volume because there are so many different ways to get to a particular volume number. We want to get there in the most efficient way possible, which is consistent with what we saw over the last couple of quarters.

Ryan S. Corbett: And then I’ll just add since to do the trifecta here, so you hear from all three of us on this one. I think, obviously, this tough quarter numbers aside, to see the scale of this ramp happening in the ordinarily, if you just sort of look at our industry or similar industries, when you’re ramping up a multibillion dollar refinery, these things take time. And ordinarily, if you were looking at this with respect to another business that might not have an existing operation within it, you’d obviously see numbers in ramp and you wouldn’t think much of it. And so the fact that the scale of this ramp is sort of happening, as impressively as it is with Michael and the team in Mount Pass, I think is, I’m very pleased of what’s happening out there, and I really do think, again tough quarters number aside and obviously, we have to keep executing.

But this is a really impressive ramp that is happening, and obviously, hopefully, we expect that to remain the case throughout the rest of the year.

Matt Summerville: Great. Thank you, guys.

Operator: The next question today is from the line of George Gianarikas of Canaccord Genuity. Please go ahead. Your line is open.

George Gianarikas: Hi, everyone. Good afternoon and thank you for taking my questions. I guess I just want to start with I was wondering if the song choice was intentional, during the waiting period. I assume that I’m old enough to know what it was, and hopefully, things do get only do get better.

James H. Litinsky: I’ll take that real quick just so, that that’s, I appreciate you recognizing the song. That is a song about, resilience and powering forward. And so we’re very methodical about our song selection as you know every quarter. So, I think one of these days, we’ll have to put together a Spotify list of all of our, pre quarter songs so you have them in one place. But that was a deliberate selection.

George Gianarikas: Nice. So, maybe to focus on the OEM decision for oxide. I’m curious as to what if you’re the ones who drove the decision around oxide sales versus magnet sales or was that something that the OEM chose?

Ryan S. Corbett: Sure, George. It’s Ryan. That’s something that is sort of mutual, I would say. The reality though is that with our current design capacity in Fort Worth, we’re fully committed there at this point. And so to bring another significant automotive OEM on would entail incremental capital investment there, which is something that we do look very hard at. But obviously our focus at this point is delivering for GM. I think the thing to think about is the size of our upstream business, at least for the near and medium term is many, many multiples of the size of the downstream business. And so what we’re focused on is ensuring, as I said, aligning ourselves with partners that may be long-term partners across all pieces of the business over the course of time.

But certainly, we need to prioritize given, we’ve done a great job on the downstream in terms of sales. We need to prioritize continuing to push forward and align with the right partners on the midstream.

George Gianarikas: Right. And do you know perchance who will be making the magnets for that OEM partner?

Ryan S. Corbett: I wouldn’t want to comment specifically. I think what I’d say about that in general though is we have seen some continued development in the market for ex-China magnet production in broader Southeast Asia. And so that opens up opportunities for us both to sell directly to those existing and future magnet bankers as well as, of course, these types of agreements where we’re providing the material directly to the end customer.

George Gianarikas: Thank you. Maybe a last question. Someone asked previous question around the state of Chinese demand, but I’m curious if you share your thoughts around Chinese supply. Clearly, some of the major, finders are losing money at current levels. I’m just curious as to Jim what your thoughts are on the sustainability of that and whether or not we could see a little bit of a supply, at least less growth or a supply reduction going forward. What are your thoughts on what exactly is happening there? Thank you.

James H. Litinsky: Sure. Well, with my usual caveat that it is always very difficult to read the tea leaves in China, What I would say is that it’s very clear that there’s losses and I think there’s a struggle in the supply chain there because nobody is doing well in this environment with prices where they are. That is, very clear. I do think that, there were some recent headlines about, China cracking down on illegal production, and I think that there’s intent of the government to continue with frankly, what’s been going on for the last few years to crack down on illegal behaviour kind of inside and outside the country. And I do think that when you think about sort of having a fully burdened cost of production, when you get a lot of that out, that is constructive for pricing and competence and frankly better for the environment.

So, I think in the backdrop of what is clearly a challenged macro environment, there are a lot of good trends that suggests that when we sort of see the upcycle that it should be good. And then lastly and just kind of going back to what I said earlier, we do continue to see, substantial international investment from major Chinese downstream producers. I think we don’t see those we’re in the US, we see a lot of headlines obviously about our OEMs and our market. But let’s not forget, obviously, China is the largest auto market in the world, but then there’s the rest of the world, and you’re seeing, real penetration there from the Chinese OEMs, and announcements around factories and localized production. And so I do think when we think about the upstream supply, the Chinese industry has to continue to supply its producers going around the world.

But at some point, there that you do sort of cross that threshold where, they’re not going to want to have big upstream losses to be supplying local competitors sitting next to them in factories that they have. So, I do think again, you know, the with the always the caveat that, nobody knows about prices, I do think that the pendulum which obviously, was very excited a couple years ago one way has swung too far the other way and it should recover at some point.

George Gianarikas: Thank you.

Operator: Our next question today is from the line of Lawrence Winder of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Lawson Winder: Yes. Thanks, operator. It’s Lawson Winder at Bank of America. Thanks very much and thanks for the presentation today. I wanted to ask just get your thoughts on the magnetics business and with commercial production being targeted for the end of this year, how do you think about that becoming EBITDA positive? Is that something that will happen this year? Do we think about that happening in ‘25? And then what’s the ramp on the EBITDA contribution from the magnetics business?

Ryan S. Corbett: Sure. This is Ryan. I’ll take that. We do expect once we are producing product in the downstream business and just to clarify in terms of the production targets, we need to be in production with pre-crystal products with metal at the end of this year. We are still targeting production of magnets in the end of 2025. But in the downstream business, when we do start production and so I think the fair read through is for 2025, we absolutely do expect a positive EBITDA contribution from that business nearly immediately as we bring it on. Certainly, we’ve been investing in that business over the last several years and several quarters and you’ve seen within some of our G&A and R&D type of line items on the P&L increased investments there.

But we do expect as we start making commercial product there to be both gross profit and nicely EBITDA positive in that business. In terms of your question on ramp and timing, we haven’t gotten into specific details there. As you’d imagine with any type of launch of a new product and new process, not too dissimilar to the midstream operation, it will take time to reach full targeted throughput. And so we expect to embark on that very methodically as well. And so that will be, of course, reaching our targeted throughput of thousand tons of NdFeB magnets, will be over a multiyear period.

James H. Litinsky: Let me just add, you know, particularly given our tough quarter that hopefully is now behind us after this call. But as a reminder, given that question that when we think about Fort Worth, a little over two years ago, that was a grassy field and this is a highly complex, product. And so the team has been executing really well. And to think that, now we’re in this place where we’re going to be EBITDA positive so quickly, building something from scratch going into a business that is brand new for us and frankly, the West is really remarkable. So, we’re moving as quickly as we can on that front.

Lawson Winder: Yes, great points, Jim. Thanks for those. And then also thinking about 2025 from a CapEx point of view, obviously, it’s early and I know you guys probably aren’t prepared to provide specific guidance, but just directionally thinking about what you provided for guidance for ‘24. Could you perhaps speak to the rough magnitude and direction of the CapEx move sort of like ‘24 to ‘25?

Ryan S. Corbett: Yes. I think it’s early for us to get into any sort of 2025 discussion. Obviously, as you would expect, we are laser focused on return on invested capital and ensuring that we’ve got a robust and healthy balance sheet. But at this point, it’s early to talk about ‘25. We’re halfway through ‘24 and you’ve seen our results from a capital deployment perspective there. And what I would say is that we gave a range of 200 to 250 in CapEx for 2024. And just looking at the progress to-date, we’re likely coming in at the low end of that, certainly with our focus on trying to be as capital efficient as possible in the current pricing environment.

Lawson Winder: Okay. Thank you very much.

Operator: Our next question today is from the line of Bill Peterson of JPMorgan. Please go ahead. Your line is open.

Bill Peterson: Yes. Good afternoon. Thanks for providing all the details. Few questions. So first, coming to the back to the magnet discussion. So, discussed decommissioning the prototype production. I guess, can you provide additional color on the progress thus far? Have you been able to produce any material that are meeting any sort of initial customer specifications or expectations? And then maybe perhaps you could shed some light on the next steps over the next few quarters in terms of optimizing performance and the manufacturing scale up?

Ryan S. Corbett: Sure. I’ll try to give you some color there. I think I would split the discussion on progress and process development into a conversation around metal versus a conversation around magnets. We discussed, I think it was last quarter or the quarter before, a successful commercial scale pilot of our metal making technology and equipment in a pilot facility that is what we’re bringing to bear in the Dallas Fort Worth facility by the end of this year. So, we feel very good about that given the fact that we’ve sort of proven out our approach to that. As it relates to magnet specifically, I think the beauty of building this business from scratch is that we’ve been able to engage with our customer, I think in a very thoughtful way to think about commercialization of this from the very get go.

So, from our perspective, thinking about the types of magnets that will produce, the mix of magnets, the number of SKUs, the performance characteristics, etcetera. And we’ve been focused on ensuring that we are biting off what we expect to be able to chew here in the near-term. And so, we are absolutely not approaching this from the perspective of taking on a 100 different SKUs. We’re thinking about this absolutely from being able to commercialize rapidly. What we’ve seen from the pilot production facility so far is and again, I don’t think we wanted to pat ourselves on the back too much on this, but we have gone from metal to a finished magnet at a performance characteristics that we’re pretty happy with already in this plant. So, when we talk about being in production with magnets at the end of 2025, we get this question a lot is, how are you going to be able to do that?

Are you going to be beating spec? And so if we’re already making magnets at the pilot plant, clearly we’re working on dialing in all of those processes, our process development and technology starting now through the end of next year to be sure that we’re ready to produce a commercial scale for GM. It’s not lost on us that the automotive supply chain is not the easiest to qualify into. And that also explains part of the significant hiring that we’ve had down in in Fort Worth to ensure that we’re ready for qualification, PFAP, etcetera.

Bill Peterson: Yes. Thanks for that. Next question is on robotics. And I think your entry song last quarter was around robotics. But you had discussed now in a few quarters of this being an area for growth. But I guess have you begun direct discussions with any companies in the robotics value chain or magnet suppliers in that space? I guess thinking about potential supply agreements given, you spoke to the OEM one earlier, and you also spoke earlier that some of your, I guess, a large chunk of your volumes are going to eventually be spoken for. Just thoughts around what could happen in that space.

James H. Litinsky: Sure. And great question. I spend a lot of time thinking about this because as we look around at all of the headlines and investment that are going into AI and now in robotics, what they call physical AI, there’s no question that there’s a lot of excitement in this area. So, we expect this to be sort of a game changer demand stream. Obviously, and I hope I’ve sort of said this, thoughtfully the last couple of quarters when we’ve discussed this, obviously, this is a few years down the line as far as something that is of scale. But I would say that this is all happening so fast. The advancements that we’re seeing out there and obviously, you can follow a lot of this stuff, yourself. It’s pretty remarkable.

And without mentioning whether or not we’ve had discussions with a particular robotics company or producer or whatever, certainly, you can look at who the leaders are and, obviously, sort of, I would say, one of the most notable leaders out there is that that is talking about this is certainly Tesla with Optimus. And we’ve seen discussion that Musk believes that will lead to $30 trillion of Tesla market cap and talking about $10 billion or $20 billion humanoid robots. And what I would say, is if you believe that that is one-tenth directionally correct, in 1-20th directionally correct, it is a game changer for rare earth magnetics, multiples to what EVs were, because there’s typically two to five times the amount of rare earth magnet content in a humanoid robot than there would be in an EV, and then we’re talking about many multiples of potential production.

Again, this is all sort of long-term, but this is happening so fast, that it’s really exciting. But again, I caveat it with, this is something that is a few years out.

Bill Peterson: Understood. Thanks again.

Operator: Thank you. And we have time for one last question today, which will come from the line of Benjamin Kallo of Baird. Please go ahead. Your line is now open.

Davis Sunderland: Hey, guys. Good afternoon. This is Davis Sunderland on for Ben. Thank you for sneaking me in here at the end. Just rewind and maybe all the way back to the beginning, Jim, in your prepared remarks, I think you talked about NdPr production cost coming down materially over the next couple of quarters. I’m just wondering if you or Michael could give some color as to what materially means, maybe if we should expect a linear decline or step changes and anything you can take qualitatively about the levers for this cost improvement. Thanks, guys.

James H. Litinsky: Alright. I’m going to hand that one to my CFO. I’ll tap out of that.

Ryan S. Corbett: Yes. No. I’m happy to take it. We made a couple of comments on this and I think the important thing to think about, in terms of our progression on the cost structure is that we talked about for the last couple of quarters, really getting our arms around the incremental variable costs and the items that were driving that and ensuring that we were not ramping in the face of very suboptimal incremental variable costs. And the important thing that we found over the last quarter or so is really getting our arms around that. So, we’re not where we want to be, but I sort of think about it as when we started to ramp the plan, it was sort of trying to figure out where the pins are. Now we know exactly where the pins are.

We just need to knock them down. So, we know, what we need to execute on and the team is working tirelessly to execute on them, as it relates to the variable costs. And what that really leaves us with is with the data that we’ve seen on a circuit by circuit basis over the last several months, what this becomes is a denominator, Ben. This is really about ensuring that, we are able to maintain the proper uptime. And then as we sort of check that box continue to push throughput and rinse and repeat, and bring more denominator into that equation, because that’s going to be really what gets us to our targeted cost structure. So, a lot of it really depends on exactly what the volumes are and exactly how we get there. So, it’s tough to give you a ton of specifics other in all the scenarios that we’ve modeled out, we absolutely from what we see now believe that as we drive volume towards our targeted throughput, we will get to our targeted cost structure.

It’s just a matter of us continuing to execute over the next several quarters.

Davis Sunderland: Got it. Thanks, Ryan. Appreciate it, guys.

Operator: Thank you. And I would now like to hand the call back over to Mr. Litinsky for any final comments.

James H. Litinsky: Yes. Thank you, and thank you, everyone. And, I guess I will officially say good riddance to this Q2. And I would say, for those of us, who spend a lot of time on these things, I would say there are quarters there are bad quarters that are bad, and then there are bad quarters that have a lot of good in them. And, you know, I would put this in the latter category. We really responded extraordinarily well to some unanticipated downtime, and things are really humming, and we feel very good about the progress that we made last quarter that we’re making this quarter, and we’re excited to talk to you next quarter. So, thanks, everyone.

Operator: Thank you. This will conclude the MP Materials second quarter 2024 earnings call and webcast. You may now disconnect your lines.